Every year, it seems like the same things are on the list but this could be the year you really do invest in a rental home.
Rents are climbing, values are solid and mortgage rates are still low for non-owner occupied properties. A $150,000 home with 20% down payments can easily have a $300 to $500 monthly cash flow after paying all of the expenses.
There are lots of strategies that can be successful but a tried and true formula is to invest in below average price range homes in predominantly owner-occupied neighborhoods. These properties will appeal to the broadest range of tenants and buyers when you’re ready to sell.
Single family homes offer an opportunity to borrow high loan-to-value mortgages at fixed rates for long terms on appreciating assets with tax advantages and reasonable control.
This can be the year to make some real progress on your resolutions. The first step may be to invest some time learning about rental properties by attending a FREE webinar on January 4th at 7:00 PM Central time zone by national real estate speaker Pat Zaby. Click here to register. If you can’t attend live, by registering you’ll be sent the link to watch at your convenience.
In 1966, the average cost of a gallon of gas across the U.S. was $0.32 and today, it is $2.49. A dozen eggs were $0.60 but they’ve only doubled to $1.33. A gallon of milk was $0.99 and today, it costs $3.98. You could send a letter for five cents and now, it costs forty-seven cents.
The average cost of a new car in 1966 was $3,500 and today $33,560. New cars have more features than the earlier models and are nearly ten times more expensive. The median price of a new home was $21,700 and now, is $304,500. (14 times more, and surprisingly, while the median price of resale homes in Wichita is modest compared to nationally, for November of this year at least Wichita’s median new home price was actually slightly higher than nationally.)
Interestingly, mortgage rates are actually lower today at 4-4.5% than they were fifty years ago when they were just under 7%. The rates have been low for long enough that many people have been lulled into believing that they are not going to go up.
Many, probably the vast majority of people in their prime home-buying years, have no experience of mortgage interest rates as “high” as 7%. Yes, rates are a little higher now than seen in a long time and have moved up quickly since the recent presidential election, but in historical perspective they’re still a bargain. Years from now, will you be remembering and comparing what they were back when? Home prices are up from a few short years ago, but not yet as much as might be expected to correspond to the level of demand. How will today’s home prices compare a year from now, and what might be the effect of the combination of a higher mortgage interest rate and a higher price for a home you want? None of us have “a crystal ball”, but for anyone pondering the best time to make a discretionary move, those could be factors of some weight in making the judgment call.
Since the election, rates have started going up and it will have a direct effect on the cost of housing. There is a rule of thumb that a ½% change in interest is approximately equal to 5% change in price.
As the interest rates go up, it will cost you more to live in the very same home or to keep the payment the same, you’ll have to buy a lower priced home.
Before rates rise too much, it may be the best time to buy a home whether you’re going to use it for your principal residence or a rental property. Low interest rates and lower prices make housing more affordable.
During the Great Recession, some homeowners elected to rent their home rather than sell it for less than it was worth.
IRS tax code allows for a temporary rental of a principal residence without losing the exclusion of capital gain based on some specific time limits. During the five year period ending on the date of the sale, the taxpayer must have:
- Owned the home for at least two years
- Lived in the home as their main home for at least two years
- Ownership and use do not have to be continuous nor occur at the same time
If a home has been rented for more than three years, the owner will not have lived in it for two of the last five years. So the challenge for homeowners with gain in a rented principal residence that they don’t want to have to recognize is to sell and close the transaction prior to the crucial date.
Assume a person was selling a property which had been rented for 2 ½ years but had previously been their home for over two years. To qualify for the exclusion of capital gain, the home needs to be ready to sell, priced correctly, sold and closed within six months.
All of the gain may not qualify for the exclusion if depreciation has been taken for the period that it was rented. Depreciation is recaptured at a 25% tax rate.
A $200,000 gain in a home could have a $30,000 tax liability. Minimizing or eliminating unnecessary taxes is a legitimate concern and timing is important.
Selling a home for the most money is one thing; maximizing your proceeds is another. For more information, see IRS publication 523 and an example on the IRS website and consult a tax professional.